Fed will look to lighten its load

The Federal Reserve’s first meeting of the new year, set for Tuesday and Wednesday, isn’t likely to generate many fireworks or any great surprises. Almost no one expects another interest-rate increase, though there’ll doubtless be more ahead down the road.

What will be most interesting, though, is what’s in the background: The nation’s central bank currently holds some $4.45 trillion worth of long-term bonds and other assets that it picked up in the years after the financial crash of 2008. A year before the meltdown, the Fed had less than $1 trillion in such holdings on its books.

In other words, the Fed will be looking to lighten its load at some point. Perhaps not immediately, and likely not in any kind of a dramatic fashion, but our nation’s central bank isn’t going to be holding onto such an unprecedented amount of securities forever.

While banking regulators generally have a pretty good idea of how their moves will influence the overall economy, the real-world implications of unwinding its current positions will need to be seen to be understood fully.

How did the Fed come to nearly quintuple its bond holdings? Simply put, once interest rates had been lowered to near zero and the economy was still deep in the doldrums, it needed to make another move. So it began the process known as quantitative easing. Though the terminology, like so much economic jargon, can make the matter seem opaque beyond all reason, the process is actually quite simply explained.

In quantitative easing, or QE, the Fed buys government bonds or other securities held by the giant banks. With this infusion of money, the banks, at least in theory, can ramp up their lending.

And the economy gets moving again.

This, however, leaves the Fed with gigantic bond holdings.

Which is where we are today.

There’s every reason to believe that regulators will be plenty happy to stand pat at present, and perhaps for some time down the road. But it’s important to note that our nation’s central bank isn’t likely to do nothing forever.

And that when it moves, the effects of its decision aren’t exactly predictable.

Those looking for a reprieve from the day-to-day craziness coming out of the White House could do worse than to keep one eye on the Fed.

The Republican

Springfield, Mass.